Saturday, August 14, 2010

Thinking About Our Economic Future (Part Two)

Our Economic Future (Part Two)

1. Gold is still the currency of the future - and don't you ever forget it. The U.S. Dollar has lost nearly a tenth of it's purchasing power in the 21st century alone, 95 percent if you add the 20th century. Austrian economists and financial experts, such as Tom Woods and Peter Schiff, argue that now is the best time in history for a new and, in the most optimistic sense of the word, improved gold standard; and, you know what, I'd argue that too! As Schiff details in his 2009 wealth preservation strategy guide, Crash Proof 2.0, it could work much like a credit card, thus reducing the burden of actually carrying physical metals. Here is an excerpt:
... there will always be people who say gold is a "barbaric relic," that gold standards don't work, and that there's not enough gold to make a monetary system viable. That's all nonsense. Scarcity is what gives gold its value, and price structures will adjust to reflect the money supply. Governments resist a return to a gold standard because it forces discipline they don't want. It forces them to make a choice: get more gold, reduce spending, or raise taxes.

The modern world has never been better positioned to use gold as a medium of exchange as it is right now.

Back in the early days, if you wanted to use gold you had to either carry it around or store it with a goldsmith and obtain a receipt; for smaller transactions, you had to use lesser metals, copper as in pennies, nickel as in nickels, and silver as in dimes, quarters, half-dollars, and, optionally, dollars. You couldn't break gold down beyond a certain point.

But today, with the internet and with debit cards, it has never been easier for the world to transact in precious metals...What I expect is that financial institutions... will emerge that are reliable depositories of gold and, in conjunction with Visa or Mastercard, will offer the opportunity to hold deposits in bullion.

Already, Americans who travel around Europe can walk into a restaurant and have a meal for 200 euros, then whip out a credit card and pay with it... The reason that's possible is that when the card company gets the bill, it does a currency conversion and takes enough dollars out of that account to settle the euro bill.

So it's just going a small step further to imagine how someone with 200 ounces of gold bullion on deposit with a company issuing a credit card could walk into a restaurant and have dinner and when the bill was presented... have their account debited the grams of gold equal to the exchange rate of currency in which the bill was presented. Being a cyber transaction, there would not be a problem breaking down a bar of gold since the service company would simply charge your account and keep track of the amount of gold remaining.

2. Obama's Economic Advisors Resignations as Indicators of Economic Downturn (and that they really don't have a clue) - It was a rather silent event, but several of Obama's economic advisers have stepped down. This is a good thing, of course, that Obama has less Keynesianists around him than before. Perhaps, with no bad economic advisors around he can make some good decisions, or be so paralyzed by their absence that he can't do anything. I'm being completely unrealistic, and on purpose. Of course, I don't believe that everyone will leave. Paul Volcker is one man on the Obama Administration that I like, for the simple reason that he helped curb the inflation of the 1980's. Pray he will be influential enough to do it again. And, even though I rarely cite them for anything but their movies, Inflation.US predicted in December that Paul Volcker will resign. Admittedly, they also said it was a long shot that will happen.

Some, like the woman in this article, probably are getting out because they don't want to have a depression on their resume. The official story is that she is leaving for her kids. And you know what, I trust her to a degree. But I also think their may be something else unsaid: she might not get that UCLA job back if the economy goes into a worse slump; nor will she get that White House job back if there is no recovery. It is best for her to get out now before the UCLA fall semester begins; perhaps the same goes for the others.

As for the "not really having a clue" part, read her statements:

Among her challenges was explaining why her prediction that the Obama-backed fiscal stimulus would keep the unemployment rate below 8% proved overly optimistic. The unemployment rate is now at 9.5%.

"I certainly hoped it would be lower," she said. "The world deteriorated between November 2008 when I started" and the initial estimates were made "and when we took office January 21. Do I wake up every morning and wish it were 8% instead of 9.5%? You bet."

Let's hope those UCLA students don't ask her to explain why she was so optimistic. And why didn't she wish the unemployment rate was 0%?

3. How the GDP is not a Good Indicator of Economic Growth - Unfortunately, people have measured the economic "recovery" in terms of gross domestic product. This is, of course, a bad indicator as I will soon explain. The problem using the GDP as an indicator of growth is that it calculates too much. Let's relate this to the tragedies of 2001, 2005, and 2010, respectively, to serve our purposes. On September 11, 2001 the terrorist attack against the United States destroyed, what I guess is, millions of dollars worth of property. Then, as businesses recovered and clean-up initiatives began, millions of dollars more were used to clean up the mess.

In 2005, New Orleans was hit with the devastating Hurricane Katrina. Once again, millions of dollars worth of businesses were destroyed, homes were lost, and people relocated. In this case, too, millions of dollars were used to clean up the mess.

In 2010, the Gulf Oil Spill devastated the Gulf Region once again; and the image of black water was engraved in the minds of millions of Americans. Like the previous disasters that affected the American economy, millions of dollars are being used to clean up the mess.

What is the point of being so repetitious? Because, none of these disasters resulted in more production, yet the GDP would have taken into account the millions of dollars to clean up these damages from these events. As Peter Schiff puts it in Crash Proof 2.0:

One big problem with GDP... is that it makes no efforts to distinguish between transactions that benefit the nation's health and those that subtract from it. Destructive activities are included as well as productive activities....every thing it and a contribution to a nation's economic health.

He then goes on to recite Exxon's Valdez as an event that increased GDP because money was paid to clean it up. Think about it in another application, if a 1000 people were injured on September 11th, then the GDP would calculate the increase in medical care spending as an increase GDP. But would that really mean we are being more productive? Obviously not. A 1000 injured people will contribute to medical costs, but paying for medical care will take away from what could have been spent on something else that is truly productive.

4. The Difference Between a Service-Based Economy Versus a Manufacturing-Based Economy

Think about the relationship between a service-based job, such as lawyering, and a manufacturing-based job, such as being an Apple Computer Systems factory worker. The lawyer has his job because he is able to effectively charge these manufacturing companies high prices for them to keep their own money in the face of lawsuits and accusations. But as manufacturing goes, so does the legal work. If I were to predict a trend, legal workers, both lawyers and paralegals, would shift from lawsuits to business start-up as legal work begins to dry up. As one Philadelphia-area lawyer told me, they get paid for doing bankruptcies, but once a business is bankrupt the legal work for that business evaporates.

The Apple factory worker, however, will always have work as long as someone is willing to pay for Apple products.

5. Short Term Volatility is their only Argument against a lot of arguments

The price of gold has been on the rise for some time now. However, anti-gold advocates rail that the time for gold is over. The evidence: short-term volatility. If the price of gold goes down 10% one week, even though the price has been increasing steadily by over 300 percent, then this short-term volatility will be used as evidence for the downfall of gold. However, in the long-term, secular basis, gold has gone up and doesn't look like its going down anytime soon.

Similarly, short term GDP-growth is also the same argument used to say that the stimulus package worked. In the quarters of 2009 that stimulus spending was most "effective", the GDP--remember its dubiousness--rose the most. This is hailed as evidence for an economic recovery. But the problem is that it is just another short-sighted trend. Long-term trends--rising unemployment and decreasing consumer habits--still prevail.

6. Long-Term Trends Still Remain

Trade deficits are expanding.
Industrial decline in US continues.
More people are on food stamps than ever before
Social Security is still a ponzi scheme

7. Is a Stock Market Crash Coming?

Wall Street Journal thinks it's possible.

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